APS Public Sector Management Course PSMC30

THE AUSTRALIAN PUBLIC SECTOR REFORMS

FROM 83 TO 93
POLICY LEVERS & PERFORMANCE INDICATORS

Keith T Linard
Senior Lecturer, School of Civil Engineering
University College (University of New South Wales) Australian Defence Force Academy
Keithlinard#@#yahoo.co.uk (Remove hashes to email)

SUMMARY

This paper seeks goes behind the cliche of the learning organisation, examining how organisational structures
can teach dysfunctional behaviour or, conversely, foster the creativity of their employees. Referring to the
decade of federal public service reforms in Australia initiated by the Labor Government in 1983, it outlines
some archetypal pathological structural factors that teach inefficiency. It discusses the application of systems
thinking in analysing these pathologies and in developing systemic interventions aimed at promoting enduring
change for the common weal.
Keywords: Public sector management; evaluation; performance indicators; learning organisation;
shared vision; systems thinking; system dynamics; Powersim.

Keith Linard, as Chief Finance Officer, Australian Department of Finance, was responsible for the Machinery
of Government Unit and later the Financial Management Improvement Unit during the 1983-88 'reform' of the
Australian Federal Public Service. Keith currently runs the postgraduate system dynamics program at the
Australian Defence Force Academy and co-directs the postgraduate program in project management.

Introduction
POLICY LEVERS & PERFORMANCE INDICATORS
The topic of my presentation this morning is Policy Levers and Performance Indicators. My
focus was to have been on the application of systems thinking to planning in the Australian
Army. When I found the length of time available to me, I decided to broaden the scope of my
presentation somewhat, to put the current staff planning approach in the wider context of the
overall reform of the Australian federal public sector.

We are here to learn from each other. I will share my experience over the past decade in the
application of systems thinking to the structural reform of the Australian federal bureaucracy,
and more recently to staff planning. I will be leaving a significant portion of the session for
your questions, or for you to share insights from your experience which might be triggered by
my comments.

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AUSTRALIA 1983-1993 - A DECADE OF STRUCTURAL CHANGE

The systems thinking adventure I started on began with the change of Federal Government in
1983. The incoming Labor Administration faced serious economic and budgetary problems.

On the economy side there was:

a catastrophic slump in resource markets which cut Australia's export earnings from
mining and agriculture;

high inflation

high unemployment rates

high domestic interest rates

decreasing competitiveness in world markets for our manufactured products.

On the side of the Federal Budget there were corresponding pressures:

increasing social security outlays
increasing international debt
internationalisation of budget reaction (i.e. the international money market was
becoming quicker to react to perceived fiscal irresponsibility ... you might be able to
fool the electorate, but not the gnomes of Zurich)
increasing opposition to high taxes.

In addition the incoming Government confronted a federal bureaucracy of which it was

suspicious and which was suspicious of it.

Finally, the bureaucracy had, over the previous 3 years, suffered what might euphemistically
be termed "bad press".

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For example, a senior attorney in the Federal Attorney General's office in one of the
States was found to have been running a brothel from the office, instead of pursuing tax
fraud, which ultimately cost the taxpayer several billion dollars in lost taxes.

For example, incompetence in the Department of Primary Industry had allowed the
export of kangaroo meat disguised as beef to the Japanese and American markets,
which had threatened a multi-billion dollar export market.

The habit over previous decades, whenever problems had arisen in the bureaucracy, was to
throw money at it. At the time the Labor Party came to office, Federal Government outlays
amounted to some 32% of gross domestic product, up from 24% a decade earlier.

One of the election promises of the incoming Government was to reform the federal
bureaucracy:
providing more efficient delivery of Government programs;
providing more effective programs, with a particular focus on social justice;
and at the same time, cutting overall Government expenditure.

In 1984 The Finance Ministry, the equivalent of the US Office of Management & Budget,
established a task force, the Financial Management Improvement Program. Our charter from
the Minister for Finance was "Reform the public service; you have 10 people and 5 years!"

FINANCIAL MANAGEMENT IMPROVEMENT PROGRAM

Our focus was on system efficiency (doing the job right), and system effectiveness (doing the
right job).

Our primary strategy was not to impose yet another layer of bureaucracy to encourage
efficiency, but to strip away the barriers which prevented managers from being effective. To
this end, we adopted a three pronged approach:

reform of the budgetary and regulatory environment, which largely determines how
much flexibility managers have;

reform of corporate and program management systems in agencies; and

reform of the general operational practices which had grown up over the years.

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A SYSTEMS THINKING APPROACH TO PUBLIC SECTOR REFORM

One of our basic premises was that managers do not make stupid decisions because they like
doing stupid things. Rather, the "System" encourages, rewards and reinforces pathological
behaviour. Over the years, layer upon layer of laws had been implemented to address specific
problems; cumulatively they were forcing managers to do stupid things.

Let me give a simple example. Under the Australian constitution, any unspent funds in the
accounts of Government department at the end of the financial year must be returned to the
Treasury. The rationale behind this may have been rational. The behavioural response it
prompted was grossly wasteful. Towards the end of each financial year every Department
would engage in a spending spree to get rid of surplus funds. The fundamental priority was to
get rid of the money; value for money or justification of need was secondary.

Right at the outset of the reform program, therefore, we focused on the "System", rather than
on individual problems, in order to:

Identify pathological behaviour;

Analyse the systemic processes that encourage and reinforce the pathological
behaviour;

identify the leverage points for change;

Implement the requisite changes.

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PATHOLOGICAL BEHAVIOUR IN THE PUBLIC SECTOR MANAGEMENT

I will concentrate on the following seven examples of such pathological behaviour, drawn
from the three areas of our review:

the fundamental focus of managers was on program inputs rather than on the purpose
they were supposed to achieve;

there were regular budget 'blow-outs';

there were regular disasters in government procurement;

management information systems were not geared to performance measurement;

program evaluation was seen as a weapon, to beat managers with, rather than as a tool
to help them;

there was excessive and wasteful use of inter-departmental services; and

incompetent management was 'rewarded' and competent management penalised.

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PROGRAM BUDGETING - CHANGING THE FOCUS TO RESULTS

Let's examine the first of these areas: the inputs oriented focus. A 1984 survey of every
senior executive in the federal bureaucracy revealed that some 94% saw their primary role as
ensuring that the money was spent and their staff numbers were at the authorised levels. Very
few saw as a high priority the achievement of program objectives.

Let me put this in perspective. In the early 1980's I was head of the resources branch of the
Commonwealth Schools Commission. At that stage the Commission was responsible for a
budget, in today's values, of some 4 billion dollars. Along with executives of other
government agencies I was obliged to appear before a budget committee of the Australian
Senate, to give an account of our stewardship. Now I was well aware of all the skeletons in
the cupboard - I was ready to obfuscate, to hedge, to give evasive answers - but I needn't have
bothered worrying.

For 3 hours I was grilled by the Senate Committee on input items only.. . . Why had our
library expenditure gone from $16,000 to $32,000 - the Agency's library expenditure, that is,
and not a word about the $50 million schools' library program . . . and why had our computer
services expenditure risen from $240,000 to $400,000 . . . the Agency's computing
expenditure, that is, and not a word on the $60 million schools' computing program . . . Why
were we so profligate in our air travel? Was it really necessary for 3 people to attend
international conferences? Why was our postage bill so high? Intense questioning on our
administrative expenditure, but not a single question on the other $3.995 billion dollars of
schools' programs. In other words, their focus was totally on the inputs.

This input focus was mirrored in the Senate reviews of all other Government Departments and
Agencies.

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What was the result? Managers knew from experience what to expect, so naturally their
behaviour was conditioned by this, as we can see from the causal loop diagram on the left.

When problems occur in a program, parliament and the press tend to focus on the inputs, on
the salaries of the bureaucrats, on their travel etc . . . so naturally management want to be
prepared . . . they set up management information systems and performance indicators geared
to input data so that they can respond to the expected questions.

If no one asks "What are you actually achieving for these millions of dollars of expenditure . .
. well, we are too busy collecting input data to spend time collecting data that no one is really
interested in.

That was our analysis at the global level. But how do you change 80 years of ingrained habit.

We started by examining why the Senators pursued the line of questioning it did.
Fundamentally they are not stupid. Perhaps they were being driven by "the System" also.
And indeed that was the case.

The Department of Finance was responsible to the Government for overall control and audit
of Government expenditure. For some 80 years it had been presenting the Parliament with
details of Government expenditure, focusing on the input items . . . how much on travel, how
much on salaries, how much on pens, pencils and paper etc.

That was the raw data the Senators got, so naturally that was how they focused their
questions.

The way to reform became obvious. Have the Department of Finance change the way it
presented data to the parliament.

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From 1986 all Government expenditure data was presented in a program budgeting format . . .
where the focus was on outputs and outcomes. Input data was much abbreviated and very
closely aligned with the program functions. For each program, for the first time,
parliamentarians were given detailed statements of:

the goals of each program

the strategies intended to achieve these goals

the outcome indicators intended to be used to determine whether these goals were
achieved

the performance indicators of the achievements to data, and

the departmental input expenditures used to achieve these results.

If we look at the right hand side of the previous slide we see our intended logic. So much for
the theory. What actually happened.

In 1986 it was all very new . . . we even ran "training courses for the members of the senate
committees . . . although of course we didn't call then training courses. Old habits die hard . .
. and the Departments themselves were rather dubious about it all. Senators still largely
focused on inputs, and were rather put out that the information wasn't readily available.

By 1987, however, Senators started to realise the political advantage of the new approach.
They could really focus on the fundamental political issues of value for money. They started
really putting pressure on Departmental heads . . . whose embarrassed answers made front
page news in the local papers. Now, chief executives don't like being embarrassed, so
naturally, they gave their senior executives a roasting equivalent to what they suffered at the
hands of the senate committees . . and so on down the line.

So we achieved the reinforcing loop which has made the goals oriented, outcomes focus, the
orthodoxy of the federal bureaucracy . . completely overturning an ingrained habit of 80
years.

CURBING THE BUDGET BLOW OUT WITH CASH LIMITS

I mentioned that the Department of Finance had overall responsibility to the Government for
control of Government spending. In essence, each Department would prepare its case for the
amount of money required to carry out the Government's decisions. They would then argue
with the Department of Finance, and after a vigorous charade the estimate would be chopped
by, say, 10%. Of course, every department, in expectation of rigorous scrutiny, had
previously inflated their wish list by 20%.

In 1978, when I took over as head of the Corporate Services of the Bureau of Transport
Economics, I prepared my Branch estimates and went to clear them with the Chairman. He
looked at them and then barked at me.

"There's a bit of fat here - how much?

It was actually 20% . . . "Er, just over 10%", I stammered.

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"Double it!"

"You mean 20%!"

"No, you fool, double it! This is going to be a tough fight this year!"

So, looking at our archetype, we see another pathological behaviour being learned - and staff
growing competent in this behaviour.

Our response was to change the systemic impetus to this behaviour. We recommended, and
the Government accepted, a bundle of reform measures, the critical one of which was a move
to cash limited expenditures. Based largely on a formula approach, Departments were given a
bundle of money and told to manage, with NO expectation of supplemental budgets.

In 1986 there was a meeting between the Minister of Finance and all Chief Executives of
Government departments. One asked if there were any circumstances where additional funds
would be given to cover any budget "blow-out". The Minister replied:

"Yes, simply write out the circumstances, attach your letter of resignation on grounds
on incompetence, and I will see that your successor has the additional funds necessary
to get things back on track."

7 years later, Cash Limited Expenditures are simply part of the orthodoxy. The pathological
cycle has been broken. The "System" is in place where management is forced to respond to
poor practices; staff down the line get the message; good management practices are learned;
staff competencies are increased; and budget blow outs are generally a thing of the past.

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REFORMING GOVERNMENT PURCHASING

I mentioned in my opening comments that a series of scandals in purchasing had eroded

public confidence in the previous Government. I'm referring here to incompetent decisions,
rather than corruption. the Australian federal bureaucracy is, thankfully, virtually free of any
significant corruption.

Government procurement was dictated by an incredible morass of laws, regulations,

guidelines etc. The official purchasing manual was about 3 inches thick. Add to that the
Finance manual, another 2 and 1/2 inches thick - plus the departmental guidelines . . . And
you finish up with a rule based, low status, hack job.

In 1987 the Head of the Division responsible for all Federal Government procurement policy
came to the Financial Management Improvement unit for help to reform the entire process.
He estimated potential annual savings of the order of 10% on all government purchasing . . .
$1.5 billion a year for Australia.

This, in fact, is a useful case study in how pathological systemic practices build up over time,
without intention, and without people noticing.

We started by examining how the purchasing system became the way it was. Where had the
basic principles originated. Why had the various laws and regulations been developed in the
way they had. We had a fascinating excursion into history.

In essence, most of the principles, and may of the words, went back to a rotten potato scam
perpetrated on the British Navy in the 1660's prior to one of the Angl-Dutch wars. Following
the near defeat, in part because of food poisoning, Samuel Pepys, Clerk of the Acts to the
First Lord of the Admiralty, personally penned rule after rule to ensure that Her Majesty's
fighting men were not so treated again.

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When the colony of New South Wales was established in 1788, a British Naval Captain was
appointed Governor. Naturally he brought his Navy Standing Orders with him - including
Samuel Pepys' procurement rules of a century earlier. Eventually, with self government, then
independence, these procurement rules found their way into the rule books of all levels of
Government. It's always easier to use the tried and true than to start from scratch.

The end result was that the way we were managing multi-million and multi billion dollar
procurement contracts in today's high tech era was largely governed by principles and
practices established 3 centuries ago to prevent the sale of rotten potatoes to the British navy.

Previous reviews had simply tampered with the occasional rule and added new ones to
prevent the re-occurrence of whatever disaster had just happened. We threw out the rule
books and started again. What were the fundamental principles that we wanted managers to
follow. There were 13 (we didn't want to be presumptuous by setting merely 10
commandments) principles such as

probity and fair dealing

value for money

openness to public scrutiny, and

equality of opportunity to potential contractors.

These principles were each supplemented by an 8 to 10 page booklet, in very simple English,
which explained the rationale behind these principles.

The federal audit act was simplified, and the audit manual included on page 1, in prominent
bold type, the message that, if anything in the rules hindered good management practice, the
Department of Finance should be informed so that remedial action could be taken.

Finally, within the broad principles so established and the framework of the audit act,
responsibility for government was devolved from the central agencies to the respective
departments.

The result has been a significant upgrade in the status of the procurement function, which
reflects the importance of the work, and significant savings in government expenditure. Of
course, under the cash limited budget approach I discussed previously, departmental
managers have a very strong incentive now to get value for their spending dollar. As a result
top management is now much more concerned about procurement policy than previously,
which further enhances the status of the job and which ensures much stronger feedback
mechanisms. So we see the different reforms starting to reinforce each other.

'USER PAYS' FOR INTER-DEPARTMENTAL SERVICES

Over the years many inter-departmental services had developed. On the argument that it was
just a useless book entry for one department to pay another department for services provided,
these services were provided free of charge. Such services included:

government catering services which, among other things, provided a coffee service
to each persons desk

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government hire car service

central payroll service

central computer bureau services,

and so on.

Where any service is provided free of charge, individuals and organisations tend to demand
more of the service than they really need. The real costs are hidden, and local managers have
no need to contain costs.

On the supply side, the managers are only too happy to oblige, as this enables them to justify
a case for more staff, and higher status for themselves. we have a mutually reinforcing causal
loop.

REWARD COMPETENCE

Finally I come to my pride and joy: the "success to the incompetent" archetype.

When Peter Senge speaks of the 'success to the successful' archetype he is clearly drawing on
his private sector experience.

Typical of what had been happening in the public sector was the archetype depicted here.

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A scandal would occur in Agency X. The Agency head would claim that it occurred because
they had insufficient staff. The press and lobby groups would demand more money for the
service concerned. The Government would then cut the staff of Agencies which were well
managed, on the grounds that they obviously had too many staff, and would transfer these
resources to the problem department. The same pathological behaviour would be reflected
within agencies, where well managed branches would be cut to save the necks of incompetent
managers.

The move to program budgeting, with its focus on performance indicators, the cash limited
budgets, and a move to performance based pay have largely eliminated this pathological
behaviour.

SUMMARISING THE RESULTS OF THE REFORM PROGRAM

12 years down the track what do we see.

You can take off those rose coloured glasses now. There have been quite dramatic culture
changes in the bureaucracy.

A change from an input oriented to a results oriented

Dramatic efficiencies in the delivery of services

Much better targeting of services to achieve the Government's social justice

orientation.

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Overall, the federal budget sector has been reduced from 32% to 24 % of gross domestic
product.

All these changes have been achieved, in my judgement, without detriment to the less
fortunate in our society. There is still free, universal hospital and medical care for all. There
is universal old age pension. There are universally available unemployment benefits for all
unemployed over the age of 18.

However, one major aspect of the process was handled very poorly. Namely, the reductions
in the numbers of public sector staff which resulted from these widespread changes.

First of all, very blunt instruments were used to achieve the staff cuts.

In one agency with over 3,000 staff, all senior executive positions were declared vacant. The
previous incumbents were told that their jobs were to be publicly advertised. They could
reapply - the catch was, only 75% of the original number of positions would be filled.

Needless to say, all these managers turned their concentration to getting jobs elsewhere . . .
anywhere. Management effectiveness virtually collapsed for several months. Not only that,
but middle managers were put on notice that, as soon as the executive positions were sorted
out, they would go through the same process.

In that agency, for nearly 18 months, morale, efficiency and effectiveness took a nose-dive.

In other Agencies, 'golden handshakes' were offered fairly indiscriminately to encourage

excess people to leave. Often the most competent, those certain that they could walk into a
job in the private sector, took the prize and left, leaving a bureaucracy depleted in competence
and knowledge base. And, of course, natural attrition at that level took a nose-dive for
several years as the next generation awaited their golden handshake.

These, and other problems which are obvious in retrospect, were overlooked or dismissed
because of lack of understanding of and attention to feedback.

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